Is the TSP a Qualified Retirement Plan?
The TSP isn't technically a qualified plan, but the tax code treats it like one. Understand this important distinction for your federal retirement strategy.
The Thrift Savings Plan, or TSP, is a retirement savings and investment program for federal employees and members of the uniformed services. As a component of the Federal Employees’ Retirement System, its classification impacts how contributions, earnings, and withdrawals are taxed. This status also determines the rules for moving funds to other retirement vehicles.
Defining a Qualified Retirement Plan
A qualified retirement plan is an employer-sponsored plan that meets the requirements of Internal Revenue Code (IRC) Section 401(a) to receive special tax advantages. These regulations ensure the plans are maintained for the exclusive benefit of employees and their beneficiaries. Employer contributions are generally tax-deductible, and employee contributions can often be made on a pre-tax basis, lowering their current taxable income. Investment earnings within the plan accumulate on a tax-deferred basis, allowing the account to compound more rapidly.
These plans also have strict rules for contributions and withdrawals. The IRS sets annual contribution limits, and distributions are regulated with penalties for early withdrawals. Required minimum distributions (RMDs) must also begin once the account holder reaches a specified age.
The TSP’s Official Classification
While the Thrift Savings Plan functions very much like a private-sector qualified plan, it is not technically a qualified plan. The TSP was established by the Federal Employees’ Retirement System Act of 1986, creating a unique retirement system for federal workers. Because it is a government-sponsored plan, it is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Despite this technical distinction, the Internal Revenue Code includes specific provisions that grant the TSP the same favorable tax treatment as qualified plans. For nearly all practical purposes related to taxes, contributions, and rollovers, the TSP is treated as if it were a qualified plan. This means participants receive the same types of tax advantages, such as tax-deferred growth and pre-tax contributions, that are found in private 401(k) plans.
Key Tax Rules and Rollover Eligibility
Participants can contribute to a Traditional TSP, where contributions are made on a pre-tax basis, reducing current taxable income. The funds grow tax-deferred, and both contributions and earnings are taxed as ordinary income upon withdrawal in retirement. Alternatively, participants can choose the Roth TSP, where contributions are made with after-tax dollars, but qualified withdrawals of both contributions and earnings are tax-free in retirement.
The plan’s classification also dictates its rollover eligibility. Funds can be rolled over from the TSP to other eligible retirement plans, such as a traditional IRA, a Roth IRA, or a 401(k) plan with a new employer, without triggering immediate taxation. The rules also permit rollovers into the TSP from other eligible retirement plans, such as a traditional 401(k) or a traditional IRA. This allows individuals to consolidate their retirement savings, and these transfers are not subject to the annual elective deferral limits set by the IRS.